The US dollar remained soft across the board as the probability of a June rate hike slightly weakened throughout this week. The market gives a 38% chance for the Federal Reserve (Fed) to raise rates at the June meeting. This dovish Fed dynamic could change before the weekly closing bell, if as expected, the US first quarter GDP is revised higher to 0.9% from the previous 0.5% print. The focus is also on Fed's Chairwoman Janet Yellen’s speech at Harvard University today. While the Fed-doves have lead the game so far this week, any hawkish hint could bring the hawks back on the field. However, it is also possible that Janet Yellen doesn’t talk about monetary policy at all, and that the US dollar closes the week flat before the jobs week.
In London, financials and energy stocks are leading losses. Materials trade north on news that European copper demand may have improved on better car sales. BP and Royal Dutch Shell are paring yesterday’s gains as oil failed to consolidate gains above the $50 level. Combined with rising tensions before the Brexit referendum on June 23rd, sellers are tempted to step in the FTSE for a potential correction to 6175, the 200-hour moving average.
The G7 summit ended on awareness that monetary policy actions alone could not create miracles. Yet, Japanese PM Abe’s warning that the world economy could be edging a post-Lehman like crisis didn’t gather too much enthusiasm.
Unfortunately for the Bank of Japan’s (BoJ) Governor Kuroda, inflation excluding fresh food in Japan fell by 0.3%y/y in May. The second consecutive month of contraction in Japanese consumer prices revived expectations that the sales tax hike, originally planned for April 2017, could be delayed by about two years and fuelled speculation that the BoJ could further ease its monetary policy to bring inflation back on path of its 2% policy target. In a recent speech, BoJ Governor Kuroda had mentioned the possibility of cutting the rates down to -0.5%. Along with weakening inflation expectations, the Yen has enough reason to consider a further depreciation past the 110 mark against the US dollar, although no one could guarantee that deeper negative rates could bring back inflation. In contrary, it is worth remembering that for decades, Japan struggled against the ‘liquidity trap’ and lowering rates in a saving-dominant economy could drive the economy deeper in desperation.
The USDJPY is having a hard time to take off today; gains are also limited by a globally soft US dollar before Janet Yellen’s speech.